Gold is one merry little corner of the market

Gold is one merry little corner of the market
Helena Wasserman
Posted: Wed, 04 Mar 2009

[miningmx.com] -- AMID all the misery and gnashing of teeth in the investment world, there is still one merry little corner of the market.

The gold price has more than doubled in the past five years and recently broke through the level of $1,000 an ounce. While some analysts expect it to top its record of $1,030 soon and others think it might even double, it has since fallen back somewhat.

But with no sign that the markets are getting less tense - last week, the US stock market fell to its weakest levels in 12 years - gold shouldn't go out fashion soon.

Gold does well in times of uncertainty, when share prices plummet and panic is a daily occurrence. Gold gives investors the reassurance of holding something physical, which won't evaporate like so many share prices.

There are other reasons why gold is doing well.

Gold mines, particularly those in South Africa, have not been churning out the stuff at the same rate as in the past. There are concerns that supply won't keep up with demand.

The world's central banks, which own huge stockpiles of gold and have been big sellers in past years, are holding on to the yellow metal because of increased international volatility.

Shelter against weak rand

For South Africans, investing in gold (which is priced in dollars) also provides some shelter against the weakening rand.

Over recent years, the boom in Indian and Chinese economies has also created a huge demand for gold jewellery.

But not everybody is convinced that gold will continue to head north.

As China and Indian cool down along with the rest of the world, jewellery demand is decreasing.

Two other factors that traditionally boost the gold price - a weak dollar and global inflation fears - are also not featuring now.

Some analysts therefore expect the gold price to retreat once volatility has died down and markets stabilise.

One of the main drawbacks of gold for investors is that unlike shares and bank accounts, gold doesn't pay out an income.

Given its limitations, many investment experts therefore advise against investing more than 5% to 15% of your savings in gold.

Still, the benefits of gold - price stability and a safe haven in volatile times - should make it something to consider.

This doesn't necessarily give you the perfect excuse to go on a bling buying spree. Jewellery is not the ideal way to go for gold. It can be hard to sell for a profit and you need to make sure of the quality of the metal and the attractiveness of the design. Then there is also the security aspect.

There are a number of other ways to invest in gold.

Shares and unit trusts

As SA is the third-biggest gold producer in the world, there is no shortage of gold companies listed on the local stock exchange.

Picking the right gold company will require a lot of homework. Buying shares will also usually mean paying a brokerage fee as well as monthly administration costs.

A more cost-effective option, which would also avoid the pressure of trying to pick the best share, is a unit trust that invests in gold companies. A unit trust pools investors' money and buys a number of different shares on your behalf. Some local unit trusts charge an annual fee of more than 1% of your investment.

Gold-backed exchange traded funds

An exchange-traded fund (ETF) invested in gold is another cheaper option.

An ETF is like a unit trust; it pools investors' money to invest in an asset. But it is listed and trades like a share on the stock exchange.

Launched only a couple of years ago, gold ETFs have been immensely popular in recent times. An estimated $40bn has been invested in this instrument.

Gold ETFs allow you to make a physical investment in the metal without ever having to make room for it in your safe. The most well-known gold ETF in SA is NewGold, which has been developed by Absa. Each NewGold "share" represents 1/100th of one fine troy ounce of gold. You can buy NewGold like other JSE share.

Another option is to buy through the NewGold investment scheme, which allows you to invest a minimum once-off amount of R1 000 or a minimum monthly investment of R300. The cost involved is 0.8% of the annual value of your investment.

Krugerrands and other gold coins

More than 55 million Krugerrands have been sold worldwide in the past 40 years.

There are two types of Krugerrands. The SA Mint sells proof Krugerrands, which are collectors' items produced in limited quantities.

More common among investors are bullion Krugerrands, manufactured by the SA Rand Refinery, which is owned by the big gold mines. The most commonly traded Krugerrand is made of 22 carat gold and weighs 31.3g.

The Krugerrand price is directly linked to the gold price. Krugerrands have recently soared through the R10 000 mark (from R27 in 1967) and sales have reached R100m a month.

You can buy Krugerrands from a number of gold coin agents like the SA Gold Coin Exchange, banks or brokers. They are usually quite easy to sell back to the institution you bought them from. The selling price will be a bit lower - for example 6.5% in some cases - than the current quoted price of the coins.

There are also a number of other coins, like Nelson Mandela gold medallions, on sale.

The disadvantage of investing in gold coins is that you have to arrange for safe storage. Also, you can only make money from gold when you sell it.

If you are unsure about your investment needs, contact an accredited financial adviser for assistance.

Via miningmx.com

posted by JB